'Mixed' Office Sector Results in 2Q

Michael Tucker mtucker@mba.org

July 19, 2018

The office sector saw mixed results in the second quarter as both vacancy and effective rents increased, reported Reis, New York.

The office vacancy rate increased 0.1 percent to 16.6 percent during the quarter while effective rent grew 0.7 percent, said Reis Senior Economist Barbara Byrne Dunham.

"These office market results prompt more of a yawn than a stir at first glance," as vacancy has drifted up 0.2 percent since the end of 2017, Byrne Dunham said. But effective rent growth for the last two quarters--0.7 percent and 0.9 percent, respectively--exceeded the previous seven quarters' growth, which averaged 0.5 percent per quarter.

"Heading into the ninth year of the recovery, the office market has never seen the robust leasing activity of previous expansions, maintaining a steady but low level of absorption despite healthy office job growth," Byrne Dunham said.

Net absorption trailed previous quarters at 2.8 million square feet, down from an average of 5.7 million square feet absorbed quarterly in 2017, Reis reported. Completions fell to 8.0 million square feet, down from an average of 10.9 million square feet added per quarter in 2017.

"Rent growth, in contrast, was healthier in the last two quarters than in the previous seven as a number of metros had rent growth of 1 percent or more in the quarter," Byrne Dunham said. She noted unlike the apartment market, the gap between the "better" office markets and lagging markets is wide and getting more pronounced. "Vacancy rates increased in close to half of the metros that Reis tracks, while others remain healthy," she said. "Most of the increase in vacancy in the sluggish metros was due to negative net absorption."

Metros with the highest vacancy rate increase included Knoxville, Tenn., Washington, D.C., Chattanooga, Tenn., Baltimore, Richmond, Va. and Wichita, Kan. But none of these metros saw rent declines. The biggest drop in vacancy, oddly, was found in smaller metros--Lexington, Ken. Jacksonville, Fla., Birmingham, Ala., San Antonio and Rochester, N.Y,--while effective rent growth was highest in larger metros including Denver, Colorado Springs, Colo., Portland, Ore., San Jose, Calif., Seattle and Orange County, Calif., the report said.

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